Should I use cash or credit?
This is a question that many consumers are asking because of the current economic uncertainty in our nation.
In fact, revolving credit—largely made up of credit card debt—fell by nearly 20% last year according to the Federal Reserve.
Credit card usage is definitely slowing due to less borrowing by consumers as well as banks’ tighter lending standards.
Is there a good time to use credit cards in special cases, and when should you use debit?
The Paper Lifestyle – Debit and/or Cash
If you have $5,000 or more in consumer debt, then you are a candidate for the “cash only” or debit card lifestyle, because you need to pay down that debt.
Using your debit card allows you to blend the discipline of paying cash with the convenience of using plastic.
Most merchants, including online retailers, accept debit cards if they accept credit cards.
Plus, there are other options such as PayPal that help those consumers who want to use a debit card instead of a credit card.
Since debit cards are broadly accepted, the decline in credit card usage is probably due in part to people wanting to get a better handle on credit card spending.
According to a recent survey by Auriema Consulting Group, 28% of consumers have shifted the way they pay for purchases since the great recession with an increase in debit card usage coming at the expense of credit cards.
In fact, 46% of consumers surveyed said they believed debit cards helped control their spending.
There are, however, exceptions when you’ll want to use a credit card instead of debit and we’ll discuss those later.
In the meantime, there is a huge population of consumers who want to just be rid of credit card debt.
What if you are one of those consumers reading this and you just want to pay down your outstanding credit card balances?
Then you may be a candidate for plastic surgery—you may need to cut up some of the department store cards and concentrate on paying down your debt.
If you do cancel any cards make sure you do NOT cancel those that are bank secured cards such as Visa, MasterCard, AMEX, Discover.
Secondly, don’t cancel those cards that you have held for a long period of time.
Instead, cancel department store cards (have them marked ‘closed at consumer request’) and other cards you’ve held for 2 years or less. Otherwise, you might inadvertently hurt your FICO (or credit) score.
Then take the following three steps to get a grip on plastic.
Step One: Face the Facts
The first step to becoming less plastic is to assess the situation. Get a free copy of both spouses’ credit report at AnnualCreditReport.com and use it, along with your records, to list the following:
- Balance on each account
- Minimum payment
- Number of payments left
- Interest rate
- Due dates
Step Two: Make the Debt Free Commitment
The next step is to commit to apply all extra monies toward debt, including:
- Income tax refund
- Bonus or hazardous duty Pay
- Insurance dividend refund
- Pay raise
- Cash gifts
- Any other unexpected additional income
Step Three: Connect with Debt Payment Resources
NFCC.org or Military Family Counselors – For free consumer credit counseling, go to nfcc.org and locate a counselor near you.
If you are a military family, then you can go to your Fleet and Family Readiness Center, Family Support Center, or MFLC counselor to have them crunch the numbers with software designed to help you pay down debt in the least amount of time.
Pay More Than The Minimum – By paying even $5 to $10 more than the minimum, it’s easier to pay on the principle thus saving on interest and paying the debt off early.
Pay Using the Snowball Effect – It’s best to organize debt in one of two ways: 1) pay off the highest interest rate or 2) the shortest pay-off time.
If all the balances are close, then pay the one with the highest interest rate.
However, if they have a much smaller note at a lower interest rate, it tends to serve as a morale booster to get it paid off.
For example, if there is a card where with a balance of $1500 at 20% versus a $200 card at 15%, then pay off the small debt first as a psychological boost.
Then apply the previous payment amount to the next bill on the list—there will be a snowball effect as momentum gains and the debts are paid down.
The Exception to the Rule: When to Use Credit
Rentals – When renting a vehicle, it’s difficult (if not impossible) to do so with a debit card.
Plus, they will put a hold on your card that can impact your checking account and cause problems, like bounced checks.
Hotels – Many properties won’t allow you to use a debit for the same reason as the rental car situation. They put a hold on your card which can be several hundred dollars.
Plus, the hold could stay on your card for a week or more. That’s why it’s best to use a credit card in this situation.
Consumer Protection – Debit cards provide fewer consumer protections than credit cards. If fraudulent charges show up on a credit card bill, under certain circumstances, the cardholder can refuse to pay them.
Under many circumstances, federal law limits credit card holder’s liability to $50 of the fraudulent charges, and most card issuers have zero liability policies for victims of identity theft.
On the other hand, money stolen from a debit card is immediately removed from the cardholder’s bank account, which means they must fight to get funds reimbursed.
Extended Warranties and Card Perks – Some premium credit cards will automatically extend the warranty on an item purchased with that card while other cards offer a price guarantee (if you find the item cheaper elsewhere, they’ll refund the difference).
Then there are those cards that still offer points that can be exchanged for products or airline miles.
These would be cases in which you might want to use a credit card.
Are you a paper or plastic person?